Many people are confused by the Inheritance Tax rules which can be hard to navigate and have tripped up many unsuspecting families.
Inheritance Tax (also known as IHT or the “death tax”) is charged at 40 per cent on the value of your estate that exceeds the Inheritance Tax nil rate band threshold – currently £325,000, or £650,000 when combined with a spouse or civil partner.
If you are passing down property, you may also benefit from the main residence nil-rate band. Currently, this can increase your tax-free threshold by up to a further £175,000, but only if you leave your home to children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million. This can result in a further threshold £350,000 when combined with a spouse or civil partner.
So, when passing down your estate to grandchildren, it is only the part of the estate that exceeds the available Inheritance Tax thresholds – whether this be the nil rate band threshold of £325,000 and/or the main residence nil rate band of £175,000 where passing down your home – that is charged at a rate of 40%.
But what if you want to pass down assets to grandchildren while you’re still alive?
This is known as gifting, and if used correctly, can help you pass down more of your hard-earned estate.
Under the “annual exemption” rule, you can give away up to £3,000 worth of gifts each tax year (spanning 06 April to 05 April) without them being added to the total value of your estate. Any unused annual exemption can be carried forward, but for one year only.
You can also gift a wedding present of up to £1,000 per person (£2,500 for a grandchild or great-grandchild or £5,000 for a child) without attracting tax.
But gifts that are not covered by an exemption or form of relief, will be relevant for Inheritance Tax if they are made within the seven years prior to your death – this is known as the “seven-year rule”.
If more than seven years have passed since the date of the gift, and you have not retained any benefit in the gift made, such as keeping a use of the item gifted and/or receiving any income from the asset gifted, then the gift will not be counted towards the value of your estate.
Consideration must also be given of any potential Capital Gains Tax implications on any lifetime gifts to grandchildren which may bring about an immediate CGT liability.
Donna Smy, a Director with Palmers who specialises in Wills, trusts and Inheritance Tax issues said: “The recent rise in property values means that inevitably a number of families – who had not expected to have to deal with IHT will discover that the estate will in fact be liable for a tax bill, particularly where significant assets have been left to grandchildren.
“However, there are a number of measures that an individual can put in place to ensure that their assets are passed on in the most tax-efficient way possible, such as taking full advantage of gifting rules and putting in place a trust.
“One of the main issues we discuss with our clients regarding gifting to grandchildren is age contingency and how having an age for grandchildren to inherit in the Will can negate the ability to claim the residence nil rate band sum.
“If this is something that you have written into your Will I would encourage you to come and see us to discuss having your Will amended.”
For more information on Inheritance Tax planning and estate preservation, please contact us.